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Bankruptcy: Keep your House, Car and Possessions…How?

Julia Jensen Smolka

As part of my work here at DiMonte and Lizak, I file bankruptcy petitions for individuals and businesses. When I tell people what I do, they usually recite a television ad which states that you can file a bankruptcy while keeping your house, car and possessions. They then ask whether its true. The answer is yes. Sometimes. It depends on the value of your assets and the exemptions given to you by the state in which you reside.

A Chapter 7 bankruptcy is the typical bankruptcy for individuals. In the bankruptcy, the debtor, the one who files the bankruptcy petition, is able to discharge all of his or her debts. However, at the same time, the trustee appointed by the court is able to take the property of the debtor and liquidate it and use the funds to pay the unsecured creditors on a pro rata basis. Of course, secured creditors, such as a mortgage lender will retain its mortgage lien.

The government realizes that people need basic minimum property to survive. Therefore, debtors in bankruptcies are given exemption allowances for certain basic items. Each state is different in the amount of their exemption allowances. In Illinois, for instance, each debtor is given a $15,000 homestead exemption, and a $2,400 auto exemption. Illinois realizes that people need to be able to live somewhere and operate an automobile. If a trustee were to sell the debtor’s automobile, the first $2,400 of the sale price would go back to the debtor to purchase a replacement car.

It is also important to note that if your property is being held as collateral for a loan, the trustee, if he wanted to sell, would have to pay off the bank or other secured creditor holding a lien on the property before any funds are available to distribute to creditors. A typical example is a home. The trustee would first need to pay off any mortgage loans, home equity loans, and back taxes. He would also have to pay the typical selling and closing costs associated with selling the home. Then the trustee would have to pay the debtor his homestead exemption allowance. If the debtors are a married couple, the homestead exemption would be $30,000 in Illinois. It is only after all of these costs are distributed, that the trustee is allowed any funds to distribute. In many cases, this leaves little or nothing for the trustee to distribute. In that case, the trustee would not liquidate the home.

Each client’s case is different, and before filing a bankruptcy, it pays to meet with your DiMonte & Lizak, LLC attorney to determine what if any of your assets are at risk, and whether bankruptcy is a viable option for you.

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